Scottish Liberal Democrat leader, Willie Rennie, has written to the finance secretary with a “constructive recommendation” to abolish Police Scotland’s hefty VAT bill.
The former eight regional services were exempt, but this changed when the national body was created in 2013.
In his letter to Derek Mackay, Mr Rennie claimed that a simple change to the force’s governance structure would solve the issue.
He agreed that the UK Treasury should lift the VAT obligation incurred by both the police force and the Scottish Fire and Rescue Service.
But he also stressed the “entirely foreseeable” problem was of the Scottish Government’s “own making” despite receiving warnings.
He wrote: “I have a constructive recommendation for you to resolve this matter.
“It involves altering the Police Scotland governance structure that would simply change it from being a non-departmental public body to a single shared local government body.
“This would enable Police Scotland to remain in its current, centralised form, but exempt from VAT.”
He insisted this was not a model his party favoured, having been opposed to centralisation from the beginning.
But he added: “It would allow you to continue with the one, centralised service whilst avoiding the burden of VAT which is now a considerable £35million each year.
“With Police Scotland facing a £200million funding black hole, it is essential other parties work constructively to repair the damage caused by the cabinet secretary’s predecessors.”
Mr Rennie argued this approach was recommended by the Convention of Scottish Local Authorities (Cosla) when the police and fire legislation was progressing through parliament.
Northern Isles MP, Alistair Carmichael, wrote to the Treasury about the same issue at the end of last year.
He asked the chancellor if there had been any discussions about the possibility of bringing the VAT arrangements into line with other agencies across the UK.
Replying on his behalf, Treasury Minister Jane Ellison said local authorities and organisations whose funding is reliant on local taxation could reclaim the VAT.
But she added: “Eligibility for these refunds is subject to strict criteria as set out in legislation, and these remain unchanged.
“The Scottish Government was fully aware of these consequences and understandably went ahead with restructuring because the estimated overall financial savings outweighed the costs.”